KUALA LUMPUR (June 9): Top Glove Corp Bhd, which is scaling back its four-year expansion programme by 22%, is not looking at any merger and acquisition in the next two years, as the group is still bracing the industry-wide headwinds caused by the acute oversupply and margin compression due to falling selling prices.
“We have been approached by some players, for us to look into their factories (due to) their willingness to sell. I will say there is no urgency for us to acquire any new factories, as we have sufficient capacity.
“Also, we have our expansion plan being deferred. So there is no urgency for us to look into acquiring any more capacity,” said its executive director Lim Cheong Guan at the virtual press briefing in conjunction with the release of the company’s quarterly earnings.
Against the backdrop of a challenging operating environment, Lim cited that the group will evaluate these acquisition deals when the gloves demand and supply is more balanced.
“Or maybe in the next two years' time or maybe by that time when valuation can be also more attractive,” he added.
The group’s plant utilisation rate stood at just 50% and it expects the trend to remain in the near term. Currently, the world’s largest glove producer has an annual production capacity of 100 billion pieces. The group, however, will expand its capacity to 156 billion, which is 22% less compared with its original plan for 201 billion pieces of gloves.
Top Glove sees margin reaching bottom
Profit margins for Top Glove have probably reached a low mark; a rebound is likely but slowly, said Top Glove’s executive chairman Lim Wee Chai, who holds a 27.47% stake.
“Margin is close to the bottom already, only a few percent. Whether it (margin) has bottomed or not, we need to wait for another few months to see the supply and demand situation,” Wee Chai said.
Like others in the glove industry, Top Glove has suffered from decline in profit and margin amid the normalised demand and profit.
“We have to go through the cycle, (when) supply reduces, the demand side picks up and stabilises in terms of stock level (for gloves). So, we should see improvement in margin, going forward,” Cheong Guan said.
Top Glove reported a net profit of RM288.56 million for the cumulative nine month ended May 31, 2022 (9MFY22), a 96.03% year-on-year drop from RM7.26 billion. Cumulative revenue was down 68.52% to RM4.50 billion, compared with RM14.29 billion. This implies a net profit margin of 6.41%.
“(Going forward,) We have to go back to basics. For the past, before the pandemic, our profit-before tax margin ranged at about 10%-12%, while, ebitda (earnings before interest, depreciation and amortisation) margin was 15%-16%,” Wee Chai noted.
At a glance, Top Glove annual profit-after-tax (PAT) margin swelled to 25% and 48% in FY20 and FY21 respectively, as glove demand was unprecedentedly strong during the pandemic and the average selling prices skyrocketed.
Prior to the Covid-19 pandemic, the glove maker’s annual PAT margin was in the range of 6% to 13% between 2008 and 2019.
Shares of Top Glove closed up four sen or 3.4% to RM1.22 on Thursday (June 9), giving it a market capitalisation of RM10.01 billion. The stock price has plummeted 53%, or RM1.37 year to date.